All Asset Classes Turn Positive

Tax time is stressful for most people. It’s a tedious annoyance, that reminds us how much money we’re sending to Uncle Sam, our silent partner in all our profitable ventures.

Hopefully, you’ve finished filing your 2015 taxes and there were no unpleasant surprises. Only pleasant ones, like a bigger than expected tax refund.

One pleasant surprise in the markets is the revival of Commodities, and the continued performance of gold.

As I mentioned last month, I expect we’re in the beginning stages of a gold rally. Gold is now up 21% for the year, and our Gold Miners ETF is up an incredible 88% year-to-date.

After five years of dismal losses, Commodities are finally positive, up 14%.

In fact, every single asset class is up for the year.

US Real Estate is up 3.8%
Int’l Real Estate is up 8.7%
Developed Market Stocks are up 0.5%
Emerging Market Stocks are up 6.4%
Bonds are up 3.3%
High-Yield Bonds are up 14%
S&P 500 is up 1.4%
Mid-cap stocks are up 0.8%
Small-cap stocks are up 2.7%

Our Large-cap Quality and Value index fund is continuing it’s outperformance this year with an 9.7% return so far this year. As we saw last year, Quality and Value doesn’t always beat a simple market-cap weighted index fund (such as SPY), but when it does, it can work really well.

(As per my compliance officer, I must mention here that past performance does not guarantee future returns, and investor returns may be lower due to transaction costs and fees, as well as timing of deposits and withdrawals).

Our Municipal Bond Closed-End Fund Portfolio has also continued to be a top performer with a year-to-date return of 7%. This surprising performance, on top of last year’s 8.8% return, has undoubtedly been helped by the declining interest rates.

If interest rates turn higher, it will definitely hurt bonds. But whether or not this happens this year remains to be seen. (See here and here for previous discussions).

If anything, there is a chance that we might see negative interest rates, as the US Federal Reserve follows the ECB and Bank of Japan in trying to fight deflation and stimulate inflation.

However, it’s uncertain that negative interest rates are the solution.

According to Jeffery Gundlach, the brilliant bond fund manager and founder of Doubleline Asset Mangement:

“There is mounting evidence that negative interest rates do the opposite of what the central bankers were hoping for. Negative interest rates are designed to fight deflation.

But they are the very definition of deflation: Your money is disappearing.

As an investor, you are going to have less money in the future than you have today with negative interest rates. That’s deflation!”

But it’s not like his opinion is going to change what the world’s central banks believe.

Given this current economic environment, I still think the market is going to remain extremely volatile this year.

The US stock market is in its 7th year rally, it’s a little over-valued (especially compared to International and Emerging Markets) and probably due for another pull-back.

But we shouldn’t start panicking or worrying about the end of this bull market just yet.

Why not? What causes the end of a bull market?

Quite simply, it’s extreme levels of optimism.

And we’re no where near extreme levels of optimism yet.

According to a recent Gallup Poll, we’re at record low levels of stock market participation for mom-and-pop investors.

And according to a recent “Big Money” survey in Barron’s magazine, even professional investors are pessimistic about the 12-month returns of the stock market. In fact, Barron’s said the poll results were the least bullish in the survey’s 20-year history.

Older readers will recall the market was overvalued back in 1996, and it continued to rally for another 3+ years before finally turning down in 2000.

We’re still very, very far from the level of exuberance, or over-valuation, that we saw in 2000.

If you’ve been reading my prior writings, you know I’m a fan of staying calm and sticking to your investment process. In the long run, we never know when returns will show up, and trying to time the markets nearly always results in poor performance.

As Warren Buffett, the world’s most famous investor has said repeatedly, the real trick to investing is to value consistency over risk, get a few things right, and then to limit mistakes.

Each year, tens of thousands of shareholders and value-investing devotees descend on tiny Omaha (population: 400,000) to attend the annual shareholder meeting. When I attended in 2008, there were nearly 40,000 visitors. I couldn’t find a hotel room within a 75-mile radius and ended up sleeping on someone’s couch, along with their cat.

The reason it attracts such a large following is due to the folksy charm of Warren Buffet, and the incredible wit and wisdom of his second-in-command, Charlie Munger. Together they hold court for a full day, and just take questions from the audience. Most of the questions are related to general investing, and macro-economic events and are both enlightening and entertaining.

This year, for the first time ever, most of it was streamed live on Yahoo! Finance.

If you have any interest in learning more about investing I highly recommend you watch the recording :